Public Bill Committee

[Mr. Roger Gale in the Chair]

Roger Gale: Good morning, ladies and gentleman. While I am in the Chair, hon. Members may remove their jackets for their comfort if they wish to do so. I cannot speak for Mr. Hood, but I am sure that he spoke for himself at the opening sitting.

Clause 155

Overview

Question proposed, That the clause stand part of the Bill.

Roger Gale: With this it will be convenient to discuss the following: New clause 1Objectives of the compensation scheme for depositors
(1) This section sets out the objectives for the compensation scheme for depositors.
(2) Objective 1 is to maintain customers confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country.
(3) Objective 2 is to be able to make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.
(4) Objective 3 is to ensure that there are compensation arrangements for each bank brand.
(5) Objective 4 is to require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way..
New clause 2Compensation payable to depositors
(1) Each depositor will be entitled to receive from the manager of the scheme referred to in section [Objectives of the compensation scheme for depositors] a sum which is the lower of
(a) the deposit protection amount; and
(b) the gross balance held by the person.
(2) The deposit protection amount is £50,000.
(3) The Treasury may by order amend the figure in subsection (2).
(4) An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament..

Mark Hoban: It is a pleasure to serve under your chairmanship this morning, Mr Gale. The purpose of new clauses 1 and 2 is to facilitate a debate in Committee about the wider aspects of the Financial Services Compensation Scheme. The Financial Services and Markets Act 2000 established the compensation scheme and set out a framework for it. Much of its detailed regulation will be formulated in consultation with the industry by the Financial Services Authority. There are important public policy issues that the Committee should have the opportunity to discuss this morning because such matters have received considerable attention in the media during the past 13 months, from the point at which depositors queued around the block to take their money from Northern Rock through to the rescue of the Icelandic banks earlier this month.
It is important to start consideration of part 4 of the Bill by having a broader debate about the compensation scheme and what objectives we want it to deliver when the FSA produces its final rules. New clause 1 sets out four objectives, the first of which would
maintain customers confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country,
including members of the European Union and countries such as Iceland. Objective 2 would
make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.
Objective 3 would ensure
that there are compensation arrangements for each bank brand,
and objective 4 would
require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way.
I shall talk about each objective in turn before explaining new clause 2.
One lesson that we can learn from recent events is the need for consumers to feel confident about their money. I mean not only the solvency and security of the bank that they are with, but what happens in the event of the banks failure, how they can access their money and how confident they are about how quickly they can get their hands on it. It means that the compensation scheme must be very clear and set out the precise terms for consumers. We want consumers to understand the limits of the scheme so that they can determine in their own minds how they allocate their funds between banks and what precautions are necessary so that they can take responsibility for their financial affairs. That is why objective 1 is to maintain consumers confidence in the banking system.

Mark Todd: One measure that might improve consumer confidence is a clear definition to consumers of exactly what coverage the FSCS gave to the deposits that they made. Currently, many consumers are left in the dark about how they are protected or to what extent they are protected. Does the hon. Gentleman agree that there should be an obligation on the provider of a product to define how the Financial Services Compensation Scheme relates to that product when the deposit is made?

Mark Hoban: The hon. Gentleman makes an important point. Consumers need to understand that. There is a shared responsibility on this matter. The FSA needs to ensure that its website gives information to customers. Banks also have an obligation to their customers to make the matter clear. I will come on to some of the challenges related to that when I talk about objective 3 on the bank versus brand debate. That is the most challenging area.
Interestingly, the US Federal Deposit Insurance Corporation has FDIC logos and information on its website for banks to purchase so that it is clear what people are insured for. Its website helps consumers to understand what is there. There is a shared responsibility and I think that there is an obligation on banks. However, for that information to be communicated clearly requires additional work on the scheme rules. I will come on to issues that individual customers might face under the current rules.
There was some lack of clarity this year from the Treasury on what would happen if a bank in the EEA collapsed. During the Treasury Committee evidence session on 22 July 2008 the then Economic Secretary, the hon. Member for Burnley (Kitty Ussher), was asked what would happen if an EEA bank faced problems. This is one of those curious areas where some protection comes from the home state of the bank and there is a top-up from the FSCS. She said:
I do not want to be pressed too far on this so as not to unduly alarm anyone.
When pressed further, she said:
I simply do not know how it will work in practice.
That was not a very helpful response from the then Minister. We now know how it works in practice. The collapse of Icesave and Kaupthing demonstrated what happens. At the time, those comments did not give much confidence to consumers.
That point demonstrates how important it is that there is clarity for people about the arrangements that apply to their bank and on how those will work in practice. That is particularly important given that our open economy enables banks from outside the UK to establish branches and be incorporated here.
The second objective of any compensation scheme is the speed of payout. We can ensure up to any limit through a deposit protection scheme, but if a customer cannot get access to their money for three or four months, the level of protection will not give them much confidence.

Stewart Hosie: On the speed of the payment of compensation, the Federation of Small Businesses has made me aware of a number of small businesses, sole traders and others that have put into Icelandic schemes money that was locked away to pay the VAT or the tax bill at the end of the year. Although it is important to put something on the speed of payment in the Bill, would it not also be useful if the Minister made it clear in this debate that Her Majestys Revenue and Customs will not add penalties for non-payment of tax if someone can demonstrate that the money is locked up and they cannot access it? That makes the speed of payment important in the future.

Mark Hoban: Indeed. The hon. Gentleman makes a valid point. In yesterdays debate in Westminster Hall on banks and small businesses, a question was posed to the Exchequer Secretary on whether HMRC guidance on payments could be placed in the Library so that people can see what the rules are. This is an important point. Many small businesses have cash in banks and are not reliant on banking services, but need access to it to enable their businesses to thrive.
As I was saying, the speed of payouts is an important issue. The target that is being consulted on is to provide the depositor access to at least a proportion of their funds within seven days. That is an important target.
The original consultation on the FSCS said:
The FSCS normally processes deposit claims in relation to relatively small deposit-taking firms within one month...more time would be needed in a complex failure involving a high volume of claims and depositors could be left without access to their funds for several months.
Clearly, that is not in the interests of the depositors. It is, therefore, important to understand what steps need to be taken to speed up the payment of claims.
In our evidence session on Tuesday, the chief executive of the FSCS, Loretta Minghella, pointed out that in the case of Bradford & Bingley the FSCS had paid £14 million overnight, so that 2.5 million people who bank with Bradford & Bingley went to bed on 28 September and woke up on 29 September banking with Abbey. In that instance, there was a seamless process as accounts were transferred from one provider to another. That was in the context of a partial transfersomething that is set out in the Billbut a very different situation could arise where a bank becomes insolvent and there may not be the same ease or speed of transfer from one bank to another, so we need to ensure that some processes are in place.
There are four conditions in the Bill that help to speed up payment, including early access to information about default firms before they fail. In the evidence session on Tuesday it was said that in the US the FDIC receives access to information about a bank three months before it is put into default.
We had a brief discussion on Tuesday about the involvement of the FSCS when a bank is in the amber stage and is subject to heightened supervision. I think that Dr. Huertas from the Financial Services Authority indicated that the FSCS would be involved at that stage. However, it would be helpful to have some more clarity, perhaps through the consultation or even today, about how involved the FSCS could be, because if it has access to more information it would clearly be in a better position to process claims. In the event that a bank defaults, it would be able to understand how the banks systems work and it would understand the volume of records. In the States, the FDIC has the time to go through dummy check runs and things like that, so that it is in a position, when a bank collapses, to ensure that there is prompt payment. Clearly, therefore, early access to information is important.
The FSCS would like assistance from a liquidator in the event of a failure to prioritise comparative deposits. It also wants to see a streamlined process, because at the moment if a deposit-taking institution fails depositors have to make a claim. Clearly, making a claim delays the process of passing money across to depositors, so if we can move to an automated process it would be very helpful in meeting the seven-day deadline. That is an important step that the Bill facilitates.
The fourth condition in the Bill is the immediate access to liquidity to pay people promptly. We will return to that when we discuss a later clause.
The FSCS has indicated that four other things need to happen, but they will be dealt with under the consultation process that the FSA will embark on. The first of them is simplifying the eligibility criteria, which is a challenge, because the simpler the eligibility criteria the greater the potential cost to levy payers, because we are talking about broadening the number of people who would be covered by the scheme. However, let me indicate two problems with the eligibility criteria at the moment.
I bank with Barclays, as do my parents. My sister works for Barclays. If it happened that my sister was a director or a senior manager at Barclays, my parents and I would be ineligible for deposits to be paid out under the FSCS. Not only does that put me in a difficult position but it would also mean that I would not have access to money.

Mark Todd: It might persuade you to bank elsewhere.

Mark Hoban: The hon. Gentleman says that I should bank elsewherea comment that goes back to his earlier intervention about clarity of information. Until I had a conversation with the FSCS, I did not know that I would be ineligible for the scheme, so we need to think carefully about that point. I have a personal interest, but in terms of the payment process, the FSCS needs to go through the list of accounts and say, in my case, for example, Ah, Mark Hoban. Hes related to X and cannot get any money. That process of weeding out close family members of directors and managers will delay the compensation process. Not only would it stop me receiving my money at all, if I had up to £50,000 in Barclays bank, but it would delay payment to other customers of that bank as well. It is important to get the simplification of the eligibility criteria right. The less restrictive the criteria, the easier it will be to make payments to affected depositors.
On another area of eligibility, a number of businesses fall within the FSCS. We talk about the matter in the context of retail depositors, but if a business meets two of the following criteriafewer than 50 employees, a turnover of less than £6.5 million or a balance sheet worth less than £3.6 millionit is a small business and qualifies to receive compensation under the FSCS. In sorting out the eligibility criteria and who needs to be paid, the FSCS will need to write to each business account and work out whether they meet those criteria. Businesses will have to submit their claim forms, establish whether they meet the criteria and await confirmation from the FSCS about whether they are within or without the scope of the scheme.
If the FSCS was given time in advance to access such information, it could do some preparatory work to find out which business bank accounts were eligible and which were not, but that is a time-consuming process. The FSA, in its consultation, needs to think about the eligibility criteria and the trade-off between ensuring prompt payment and the possible increase in the cost of the scheme to levy payers. There is no easy answer. However, some easy things can be done, and I plead my own case in that regard. The issue relating to relatives of senior directors and managers should be dealt with, but the FSA and the stakeholders will also need to think about more complex issues.
The second important issue with regard to simplifying the payments and giving customers confidence is the single customer view: knowing quickly how much a customer is exposed to a particular bank and what deposits they have. That aspect causes some concern in the banking community. I understand that Abbey, just before its acquisition of Bradford & Bingley, and Alliance & Leicester, had a single customer view, but in the evidence given to the Treasury Committee that appeared to be unique among banks. At present, most systems do not necessarily facilitate banks looking across their entire customer base and identifying all the accounts that belong to me or to somebody else. The Governor of the Bank of England suggested in his evidence to the Treasury Committee that it was an important thing to do, but that a period of grace should be given to enable banks to get it in order.

Peter Bone: Is there not another slight complication? My hon. Friend gave the example of Santander. There are four banking licences in that group, so it is not a question of just one brand in that case; to work out the situation there the process would have to be divided between the banking licences.

Mark Hoban: My hon. Friend makes an important point, on which I shall focus when I mention objective 3, because it needs to be resolved if we are to get the process right and give consumers confidence. The point also relates to the earlier intervention by the hon. Member for South Derbyshire, who talked about clarity, because it affects the clarity of a customers understanding of their level of protection under the scheme.
The third change that the FSA has consulted on is the need to net off peoples balances with a bank. A customer may have £30,000 in their current account, but a mortgage of £150,000 with the bank. Under current rules, the bank account balance would be offset against the mortgage, so the customer would end up owing less on their mortgage, but they might have no ready cash with which to go about their daily transactions. That is a challenge for people. There was consensus in the evidence session on Tuesday that people should be paid out of their gross balances, and the only qualification to that was the offset of their overdrafts against their balance.

Mark Todd: I was going to say that the qualification, which would certainly apply with the more complex banks, might be that it is perfectly possible that somebody would hold an overdraft under one brand, but a substantial deposit under another. I would have thought that there was a strong argument for allowing a net off on a cash deposit basis.

Mark Hoban: The hon. Gentleman makes an important point. There is an issue about overdrafts offset against bank accounts, but it also goes back to the brand versus bank problem. If a customer has an overdraft with one brand and cash with another brand, how do they mesh together? It is not a straightforward area and it requires careful thought and consultation. I have some sympathy with the view that if someone has an overdraft with one brand and a balance with another, there should be a net off, but we need to think through carefully its impact on the distinction between brands and banks. Whether the payment is gross or net is an important issue and there was consensus on Tuesday that, subject to the offsetting of overdrafts, gross balance would be the easiest way. That would enable customers to repay their long-term liability, such as a mortgage, in their usual way, rather than having their current account balances offset against their mortgage.
The fourth issue is that there should be streamlined arrangements for people to open new accounts with other banks when they have received their compensation. The transfer of accounts between Bradford & Bingley and Abbey was a seamless process because it was a partial transfer. It would be different if a bank became insolvent. What would happen when a customer received their cheque, if it were done in the traditional, old-fashioned way? Would they need to go to their local bank branch and go through the whole customer procedurethe money laundering steps that have to be gone through when opening a new bank account? Would it not be more appropriate to grandfather a set of bank accounts from a failed bank into the new institution, to enable the payment of the cheque or the transfer of funds between accounts to work seamlessly? The more steps that are put in the way of enabling that payment to be made quickly and efficiently, the less confidence people will have in the FSCS and in the strength and stability of the banking sector. Those are all important issues that need to be worked through in the consultation.
The third objective is the issue of brands versus banks that we touched on in the evidence session on Tuesday. There is some confusion among customers about quite how they are covered. In the evidence to the Treasury Committee, the general counsel of the FSCS pointed out that the compensation limit is set per banking licence, of which a bank may have more than one. It is certainly not set per brand. The general counsel said that
if a bank does trade with a number of divisions or brands under a single registration only one limit would apply to depositors even if they had accounts across the brands.
Let me give the Committee some examples, as much for education and future guidance as to point out the problems. NatWest is a subsidiary of RBS, but has its own licence. Consequently anyone with an account with NatWest and RBS has two lots of £50,000. However, within RBS there are two other brands, Virgin Money and Direct Line, so anyone with £50,000 with RBS, Virgin Money and Direct Linea total of £150,000would be covered for only £50,000. Santander has within its group four brands: Asda, Cahoot, Abbey and Bradford & Bingley. Again, the £50,000 limit applies. Coutts, which was the Queens bank and is now the peoples bank as it is owned by RBS, has its own licence too.
If I went into a high street bank tomorrow, how would I know what level of cover I had between the different brands it operates? It becomes confusing for customers. It affects not just the banks, but building societies in a slightly curious way. There is a £50,000 limit per building society, but the Derbyshire and Cheshire building societies, which are now owned by Nationwide

Mark Todd: Not quite yet.

Mark Hoban: When they are taken over they will have separate brands for a while, but they will have only a £50,000 limit. There is potential for confusion here. Teresa Perchard from Citizens Advice said:
If there is a limit, and it applies to a business, not an individual brand with which a customer thinks they are trading, the brands that are trading with their customers need to tell them when they have exceeded the protected limit, I am not aware of financial institutions doing that as a matter of course...The consumers cannot know what they are not being told by the supplier. [Official Report, Banking Public Bill Committee, 21 October 2008; c. 57, Q166.]
That takes us back to the point made by the hon. Member for South Derbyshire: there needs to be some clarity for consumers. We need to think carefully about how we communicate the information to them.
We may take the view that the easiest thing to do would be to provide the limit per brand, but there is an issue about the legal definition of a brand. I am not sure that I would know where to start. If we went down the route of compensating by brand, a bank might decide to roll two brands into each other. How would it tell its customers that, having gone from two £50,000 limits, they now had only one £50,000 limit?
There will be a marketing advantage to banks in having multiple brands. They could tell their customers that if they bank with brand A they will get £50,000 and they will get another £50,000 with brand B, but in the event of a default of a multi-brand bank there would be an increased cost to levy payers. To go back to the example of RBS: trading through three brands there is £150,000 cover, but simply trading through RBS there would be only £50,000 cover. The other levy payers would have to pick up quite a significant increase if we went down the per brand route.
In all this debate, the broader the scheme rules become, the easier it is for consumers to understand and to recover their funds, but the scheme potentially becomes more expensive for the levy payers. An economic analysis needs to be done as part of the consultation by the FSA to get the scheme right. I have touched on objective 4, which is the issue about net and gross in the context of objective 3, so I do not think that I want to go back through that debate. I want to move on to new clause 2.

Mark Todd: The hon. Gentleman has not yet touched on the definition of what should be paid in relation to a products conditions. For example, if one invests in a bond with a commitment for 12 months and that period is interrupted by the collapse of the financial provider, will a penalty be levied for an early withdrawal and will there be an attempt to compensate the loss resulting from the early termination of the bond, as is the case with accounts that have 60-day withdrawal limits? How does the product definition interface with the compensation scheme?

Mark Hoban: The hon. Gentleman raises a point that I had not investigated so closely, but it would clearly be unfair for a customer to have to pay a penalty if their money was meant to be locked up for a year. The second issue is whether they should be compensated for the loss of interest, and I am not sure that I know the answer to that. Again, it might seem fair to compensate the consumer for the fallback, but there will be a cost to levy payers. Perhaps the equitable position is: no penalty, no additional compensation.
The complexity of the different financial products on offer needs to be reflected in how a scheme is drawn up, which will then need to be communicated to those who buy the products. That is not a straightforward process, and it is unfortunate that the trigger for the debate has been a banking crisis. It would have been better to think about those issues and resolve the problems at an earlier stage, rather than waiting until we are in the thick of it.
The hon. Gentleman will recollect that in the Treasury Committees report, The Run on the Rock, which was published in January, both the Governor of the Bank of England and the chairman of the FSA, Sir Callum McCarthy, commented that they had highlighted in an exercise on that area the need to think through carefully what would happen when a bank collapsed, and that was long before the collapse of Northern Rock. We are paying the price for not acting on that earlier.

Stewart Hosie: There is an ancillary point to the one made by the hon. Member for South Derbyshire. If compensation is paid quickly from a 60-day account or one that is locked away for a year, that might change an individuals tax liability because it was locked away in a scheme designed at least in part to be tax-beneficial. I take it that the hon. Gentleman expects to add that complexity to the considerations as well.

Mark Hoban: We are getting into very complex areas. I think that I am right in saying that the Government did vary the rules on cash ISAs so as to encourage those Northern Rock depositors who had withdrawn their money from cash ISAs to put it back in. They used the tax benefit to do so, so that might be a precedent. It is very interesting, but I think that we are getting into quite complex territory on that.
I shall move on to new clause 2. I think that we know the limit for the deposit protection scheme, but we are in a slightly curious situation. It is slightly odd that the FSA had a consultation on the limit earlier this month. It was going to consult on £50,000 as a limit, and within a couple of days of the publication of that consultation the limit suddenly became £50,000. However, we have moved into a period of some uncertainty about what the limit actually is. Yes, the limit set out by the FSA is £50,000, but that limit has been varied in the case of the Icelandic banks that had financial problems. Where an account has not been transferred, for example, to ING Direct, the depositors would be paid out in full through the Financial Services Compensation Scheme, and the same applies to some of the other Icelandic banks. We now have a situation where, although the de jure limit is £50,000, de facto it is unlimited. In his evidence on Tuesday, the Minister said that the Government
will do whatever it takes[Official Report, Banking Public Bill Committee, 21 October 2008; c. 9, Q16.]
A few weeks ago, when the Irish authorities introduced unlimited guarantees, the Government were up in arms. I think that either the Chancellor or the Prime Minister complained to their Irish counterparts that that had changed the playing field.

Mark Todd: The hon. Gentleman is very indulgent in giving way so often. One of the other difficulties is the ambiguity about the meaning of the guarantee. Is this guarantee to be applied to the FSCS, or is it provided by the state and the taxpayer? The source of the money is completely different, as are the implications in terms of moral hazard. One of the difficulties in these bold statements about guaranteeing payments on all accounts, is how that interfaces with the existing guarantee scheme. We have not seen absolute clarity here or in other states in the European economic area.

Mark Hoban: No, and in a sense it is a moving feast. I understand that the FSCS will cover the first £50,000 and the Treasury will cover any balance above that. That seems to be the implication, but it would be helpful if the Minister could clarify it. What do we tell our constituents? What do banks tell their depositors? Is there a £50,000 limit, or next time, will the Government do whatever it takes to resolve the situation?
The new clause sets out a limit and provides a mechanism for changing it. Doubtless, the Minister will say that that creates a degree of inflexibility and that we cannot wait for affirmative procedure to go throughI know the Minister well enough from Committee last week to know the sorts of arguments that he might deploy. However, my argument is not about the parliamentary process but the clarity of what we tell our constituents. We have moved from a situation of great confusion in October last year, where 100 per cent. of the first £2,000 and 90 per cent. of the next £33,000 was protected, to a coverage of 100 per cent. for £35,000 and then for £50,000. Now we have moved to, whatever it takes. I am intrigued to see how that might be legislated for.
Customers need clarity. People are moving money from account to account and they want to get their financial affairs in order. Mixed messages from the Government do not help our constituents understand where to put their money. That concludes my remarks on new clauses 1 and 2.
I apologise to the Committee for spending what might have seemed a long timenearly 40 minuteson the two new clauses, but the FSCS is an important part of the arrangements that should be in place to protect depositors. Because of the way that the FSCS works, and how its regulations are developed, if I did not use this opportunity to raise such issues, there would be no opportunity for parliamentary input into the process. I tabled the two new clauses in the hope that they would stimulate debate and provide guidance to the FSA and the financial services sector about the views of parliamentarians on these matters, and the importance that we place on getting the arrangements right so that consumers will be protected in the event of a failure. Proper processes must be in place to ensure that, should such a failure occur, customers will get access to their money speedily.

Roger Gale: The hon. Gentleman will understand that if he wishes to press either new clause to a Division, they must be moved at the end of the consideration of the Bill in the appropriate place.

Colin Breed: It is a pleasure to work under your chairmanship, Mr. Gale. The hon. Member for Fareham gave a considerable list of potential difficulties and hurdles. It is interesting to note the genesis of the compensation scheme many years ago. It was set up under entirely different circumstances and was brought in not for banks per se, but principally for what were then called licensed deposit-takers. They did not have the same safeguards, traditions, capitalisation and so on as institutions working under banking licences.
It was deemed a good idea to ensure widespread opportunities and to increase the number of deposit-taking institutions; therefore, the institution of licensed deposit-taker was set up. The category ceased to be some years ago, but the compensation scheme remained, and there have been no significant changes to it.
I do not think that in those days there was any perception or any view whatever that the scheme would apply to what may be called mainstream banks. The idea of a major high street bank falling into a situation where it would come into the scheme was ludicrousit did not even begin to be mentionedbut of course we now live in very different times.
The compensation scheme was set up when there was a much larger number of smaller banks and licensed institutions, when there were significantly less, if any, of the connected brand problems that have been highlighted this morning, when relationships generally consisted of a customer and a bankpeople were not multi-banked and so onand when there were few, if any, overseas banks operating in this country. We have to ask ourselves whether the scheme should now be radically changed or whether banks should try to squeeze themselves into an extraordinarily difficult straitjacket by completely changing their operations and relationships with their customers. Should we perhaps devise a completely new scheme, which could deal with todays problems in a more modern way and take account of what global banking might become over the next 10 or 20 years?
We have heard about the potential problems, and I have thought of quite a few more which I do not really want to go through. To be honest, they will make any financial compensation scheme extremely difficult to implement. I am a member of the Treasury Committee, which has been looking at some of the issues. We thought about pre-funded schemes, and a couple of our members went to the US to look at its scheme, but the US has an entirely different kind of banking network anyway. I wonder whether at the end of the day we will be able to devise a new compensation scheme that will deliver all the things that we want it to deliver in todays different world.
One thing that I and, I am sure, all of us accept is that there is a need for a speedy response to the current problems, but I am not sure that we will be able to provide a lasting solution for the future. There is no doubt that consumer confidence, individually and collectively, has been knocked. Restoration of confidence in one way or another is a key factor, but that is not just about our trying to devise some kind of legislation and compensation scheme. It demands that not just the banks but, indeed, the bankers start reflecting and operating in a way that will restore the confidence of the country and individuals, rather than our providing a legislative framework for oversight and regulation. Oversight and regulation are the end of what should never come to be, and the banks have a real responsibility to deliver and restore confidence in what they do.
Most customers do not think about the risk; indeed, why should they in some respects? Worse than thatas has been said and perhaps as will be highlighted in the futureeven if they do, it is almost impossible to obtain the information to find out or judge that risk. We know that even clever accountants, with whom we are blessed in the Committee, find it extraordinarily difficult to look at any bank balance sheet and devise an opportunity to consider how strong or weak a particular institution is.

Robert Flello: Is not one possibility for advertising the potential risk or otherwise to simply publish the most common credit reference agency reference rating for that particular bank alongside where a bank advertises its rate of interest?

Colin Breed: That might be a way, but those of us who have looked into credit ratings agencies might begin to question whether their advice was worth much more than a bag of beans anyway. I agree in slightly more simplistic terms that that might be one way to approach the matter, but regretfully, my opinionand I suspect that of many members of the Treasury Committeeis that the credit ratings agencies are part of the problem and not perhaps part of the solution. However, I thank the hon. Gentleman for his contribution.
Considering the off-balance sheet items, various connections, different brands and relationships between institutions and everything elselet alone a banks relationship to the FSA and the compensation schemeit is difficult for anybody sensibly to find out sufficient information, even if they were technically professionally qualified, to really judge whether there is a risk in depositing money in a particular institution. Customer information, advice and so on is vital, but UK-based only institutions, UK-based but foreign owned institutions, and branches of foreign banks all have different relationships, different capital requirements and a different way of selling their services. If they are in the UK, all of those institutions have to be regulated in some form or other. We have sophisticated, highly developed banking and deposit institutions and a largely unsophisticated system that we are unable to make sophisticated in terms of depositors and customers. Marrying those together will be a difficult task.
On timely paymentsagain, the Treasury Committee has spent some time on this, particularly with its US experiencepeople of course want to be able to get their money quickly. Sometimes that is necessary because people have to complete transactions to which they have properly contracted. Some people will no doubt require their money in cash, but whether there will be enough banknotes available is another matter. An electronic transfer, bank draft, or whatever, needs to be reasonably timely. Whether moving from the current situation to seven days is a practical solution is another matter, but the process has to be timely so that transactions can take place.
As the hon. Member for Fareham has said, that matter is complicated by the sheer number of different relationships. There are customers with credit accounts, customers with loan accounts, customers with long-term mortgages, customers with credit cards, customers who have guaranteed businesses in which they are a director, and customers who have guaranteed businesses in which they are not a director. There are a multiplicity of relationships between banks and their customers. The intervention in one relatively small area of that relationship will inevitably cause ripples through the rest. There are potentially enormous difficulties in getting this right. I did not even realise the potential issues in relation to people who happen to be related to senior managerswhich I find totally and utterly ridiculousbut they complicate things even more.
In order for there to be timely payments, the aim must be simplicity, not complexity. The simplicity of obtaining themwe may have to impose some caps on how much can be paid within a certain periodhas to be much more clearly thought through because it is confusing. Most of the relationships that are being exposed are confusing.
On gross and net payments, most banks have clear terms and conditions for loan facilities. Back in the old days, people received a two or three-line letter saying that they had an overdraft. Now they receive a 28-page facility letter. If the terms and conditions mean anythingthey must mean something not just when the bank is operational, but if it failspeople must consider whether a longish-term relationship in their borrowing requirements may be jeopardised. It is all very well saying that banks must make timely payment of all deposits, but does that mean that they may request all the loans to be repaid at the same time? Serious questions are starting to arise.
Banks must be more explicit about set-offsetting off a credit account against a debit accountand whether an account can or cannot be set off. A clear condition or relationship should be able to deal with the problem of gross or net payments.

Peter Bone: The hon. Gentleman is making an important point about complexity, and whether the scheme can be adjusted or we must start again.
Set-off will cause delay, and we are trying to create an unusual situation: we are giving special protection to a class of creditor. The asset, which may be an overdraft or a loan, could be left as it was because it will be collected in the ordinary way or sold on to another bank. I am not sure that there is much need for set-off.

Colin Breed: That is probably quite right, but most loan agreements at the moment, and the small print of clause 106(2), probably give banks the right to set off anyway. Most people do not realise that because they do not understand the potential for that, but banks must be more explicit and customers must be more aware of whether set-off applies.
In simple terms, if someone owes money on a car loan, for example, and has a lump of money in a deposit account, would it be sensible to tell the customer that they cannot have the money in the deposit account because they must pay off the loan account? In those rather simplistic terms, I think that would be inappropriate, so it would probably be inappropriate in more complex ones.

Stewart Hosie: I am listening to the debate, and I am convinced that setting off is not a good idea. However, if it happens, can we have an assurance that if someone has an overdraftperhaps a sole trader running a normal bank accountand it is set off against cash, the overdraft facility would not also be removed, because that might cause all sorts of difficulties with future trading?

Colin Breed: The hon. Gentleman is entirely correct. We are discussing the disruption of peoples businesses, organisations, charities, clubs and so on when a major institution fails.
That brings me to my last point, to which I do not have an answer. We are deciding when the hurdle or the bar should be raised or lowered to cushion the effect on a depositor or a relationship with a bank. To what extent does the state have an obligation to cushion a set of depositors with certain institutions in respect of tax or overdraft problems, and so on? That has not been clearly thought through. All sorts of statements have been made to try to restore confidence because of systemic risk and so onlargely, I suspect, because it was thought that making the statement would restore confidence, and the obligation to pay out under the statement would not happen. Let us hope that was the case, because some wild statements have been made, such as We will do whatever is necessary or We will pay out whatever is required, on the basis that that would restore confidence in the banking system and stabilise the situation so that no payout would be required. That is okay in an emergency, but it is not satisfactory to legislate for it formally.
New clause 2 relates specifically to that matter and is a very worthy attempt to say, Look, lets try and make an effort. As someone who has read much about such matters and been involved in banking for more than 30 years, I am deeply sceptical, given the current situation, about whether the current financial compensation scheme can be amended sufficiently to address potential problems. Although the provision before us might be a short-term measure, it does not preclude the FSA from carrying out much more detailed work. We might have to return to the matter in the future.

Peter Viggers: The compensation scheme in the Bill is an unsatisfactory way to deal with a profoundly disturbing situation and is, of course, misnamed: it is not a compensation scheme, because strictly speaking compensation is when a malefactor carries out an act and is forced to compensate and make good through money or some other means the injury that he has done to somebody else. Strictly speaking, therefore, the word compensation is wrong in the sense used in the Bill. It is used in the criminal injuries compensation scheme, under which the state compensates someone for an injury suffered, but used here the word is wrong. Again, strictly speaking, the word used should be relief, because the state is relieving problems suffered by an individual.
It is disturbing that the issue of fairness does not seem to enter the debate. In fact, new clause 1 makes it absolutely clear that the object
is to maintain customers confidence in the UK banking system,
but does not say that the object of the exercise is to be fair. And, of course, the system is not at all fair, because the burden of loss will fall extremely unfairly on certain individuals. Those with up to £50,000 in different banks will be fully compensated, but if their bank, or the institution in which they made the investment, is part of a grouping they will be compensated up to a total of £50,000 only, which is unfair. Furthermore, individuals with deposits in Icelandic banks will be fully compensated, but corporate bodies with similar deposits will not. That, too, is extremely unfair.
I could mention many cases that would tug at the heart strings, but I cannot think of a more extreme caseit is more extreme even than those of the local authorities that have lost out, meaning that council tax payers will suffer and paythan that of Naomi House childrens hospice, in my own area, in south Hampshire. It invested some £5 million in an Icelandic institution and now those who contributed to the hospice, the children supported by it and their parents will suffer. Yesterday I received information from Naomi House about a proposed campaign for compensation and support in view of the loss suffered.
Two days ago I received a letter from a constituent. Both he and his wife served in the armed forces. In anticipation of retirement they sold their house before moving and put their lifes savings, including the value of the house, into Kaupthing Singer & Friedlanders Isle of Man branch. They will not be compensated, because Isle of Man institutions do not carry compensation. They stand to lose everything that they have worked for. Will the Minister spell out the guiding principle, if there is one, behind the Governments decision? Are they simply looking for signs of panic, and trying to staunch the flow of fear-fuelled withdrawals by bringing forward a spatchcock scheme to compensate individuals and stem the panic? New clause 1 states that the objective is to maintain customers confidence. Is there any principle behind the proposals that the Government are putting forward?
I have another, detailed point to put to the Minister. New clause 2 states:
An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.
If the Government were minded to go down that route, would they add the words and until to such a thought, so that an order could not be made retrospective? Will the Minister spell out, for the benefit of all those who have lost out and who will not be compensated under the scheme currently proposed, the point of principle on which the Government are acting?

Peter Bone: I have one question for the Minister, but, first, will he confirm that investors in the Channel Islands and the Isle of Man who have money in an Icelandic bank have no compensation rights? I believe that to be the case, but it has not been widely published, and the issue causes significant concern to a great number of people.
We are talking about a scheme that will compensate people to a level of £50,000, but are we talking Alice in Wonderland? Will any Government, especially this one, ever allow anyone to lose any money that they have put into a British bank? Pick any bank: suppose that the scheme were in place and Barclays had failedthere is no reason to think that it would fail, but let us suppose that it had. Can the Government guarantee that they would stick to the scheme and protect all depositors, and that they would not override it? Is it not the case that in the real world, because of the political implications, the Government could not let a bank fail and not cover the depositors? We are spending a lot of time discussing the scheme, and I want to know that the Government will actually keep to it if it is put in place.

Ian Pearson: Clause 155 introduces part 4 of the Bill, the purpose of which is to make several amendments to part 15 of the Financial Services and Markets Act 2000, which sets out the legal framework for the Financial Services Compensation Scheme. The changes are largely detailed and technical, but there is one potentially major innovationthe provisions allowing for the introduction of pre-funding, to which we shall return shortly.
Given recent events and the great public concern about depositor protection, it is right that we should have a wide-ranging debate, as we are having today. New clauses 1 and 2 give us the opportunity to do that, and I am sure that was the intention of the hon. Member for Fareham in tabling them. Their overall effect would be to add to the Bill objectives or requirements for the scheme. However, the matters that they deal with can already be dealt with under FSA rules. I remind the Committee that the FSCS is responsible for compensating consumers with claims that any kind of financial services firm is unable to meetthat applies not only to deposit takers. To provide new, statutorily defined objectives for depositor compensation alone could divert attention from other important areas that the FSCS covers.
As the hon. Member for Fareham has clearly outlined, new clause 1 would set four objectives, in relation to protecting deposits, that the FSCS would have to meet. They range from the very general objective 1 to what are in effect detailed requirements for the scheme in objectives 3 and 4, although I appreciate that the purpose might be to stimulate debate.
New clause 2 covers detailed requirements for the scheme in a particular area. It proposes putting the headline limit for depositor compensation in the Bill and that any change to the limit would have to be made using the affirmative resolution procedure. That proposal is not desirable. The FSA rule-making procedures are better suited to making such changes. As was demonstrated last September and more recently, FSA rule-making procedures need not be a barrier to making rapid changes to FSCS rules. The affirmative resolution clearly would be. I ask the Committee to reject the new clauses.
I will reply to some of the general points made in the debate. The hon. Member for Fareham quoted the previous Economic Secretary, now the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Burnley. She was correct in her description of the current legal situation. It is the case that the Government will work with the Commission and other European economic area states to improve protection for depositors in cross-border situations. We welcome the Commissions proposal to amend the deposit guarantee schemes directive, which will now be considered by the Council. We have also recommended putting in place, as a regulatory measure, agreements between the EEA states to require home state deposit guarantee schemes to act as a single point of contact for depositors in those states. We believe that will bring simplicity to the system.
I want to be clear about the general issue of compensation when it comes to the Icelandic banks. The Government, not the FSCS, will pay for extra cover over the FSCS limit if there is a shortfall. However, payment will be through the FSCS for the sake of simplicity as the aim is to get money quickly to customers. The Government guarantee is quite separate from the FSCS and is not a permanent measure.

Mark Hoban: The FSCS will pay up to £50,000, but my understanding is that it will recover from the Icelandic authorities the first £16,000. Will the Minister clarify what will happen if it is unable to do so? Will levy payers meet that cost or will it be the Treasury?

Ian Pearson: I shall come to that point in a moment. First, I shall talk about the £50,000 limit that hon. Members have mentioned and the concept of moral hazard, which is clearly important. The situation with the Icelandic banks was exceptional. It was right for the Government to say that all retail deposits would be guaranteed. We did that to be quite clear. We wanted to ensure that there was confidence in the banking system. We do not see it as a permanent measure for the future. The Government will not for all time guarantee all retail deposits. In the circumstances, we think that was the right course of action.
I also want to clarify the position with respect to deposits in the Isle of Man. The hon. Member for Wellingborough is right in his belief that they are not covered by the FSCS. As he is aware, offshore jurisdictions aggressively market themselves as being outside the UK regulation and tax regime. They clearly are outside UK regulation and thus outside UK compensation.

Peter Bone: If we were talking about normal times as they have been for the past 100 years and a bank had failed, the Minister would have been happy for the £50,000 limit to come in because it would not have affected the rest of the system. However, the circumstances are exceptional, which is why the Icelandic banks were protected. If that is the case for the Icelandic banks, why does it not apply to investors through the Channel Islands and the Isle of Man, who could be British citizens?

Ian Pearson: The investors might be British citizens, but they chose to make investments outside the United Kingdom regulation and tax regime. That was a matter for them. I want to be clear that the Government have taken strong, decisive action with the Icelandic authorities. We have been in regular discussions with them. There have been conversations at Prime Minister and Chancellor level, and we will do everything that we can to support non-retail depositors as well as retail depositors in respect of creditors in administrations in Iceland. Obviously, the administrations taking place in the United Kingdom, where subsidiaries of Icelandic banks have been under the regulation of the Financial Services Authority, are in a different position, and we hope to see speedy progress with the administration process.

Colin Breed: We have not reached such matters yet, but while the Minister is on the Icelandic situation, will he say whether he expects Icelandic banks to be part of the pre-funded scheme in future circumstances? In other words, in future, will we be looking at Icelandic banks, if they wanted to receive deposits from the UK, being part of the pre-funded scheme by obtaining money from them in advance?

Ian Pearson: When we reach the debate on pre-funding, I shall reiterate our commitments that we do not regard pre-funding as something that would happen immediately. We would discuss it with the Bank of England and the Financial Services Authority at the appropriate time. Foreign banks with subsidiaries in the United Kingdom that are regulated by the Financial Services Authority would be part of the Financial Services Compensation Scheme, but foreign banks with branchesthe case with two of the Icelandic banksare regulated by the Icelandic authorities and are not part of the FSCS.

Mark Todd: Does that not reinforce my earlier point that customers do not examine carefully the regulatory environment in which they are committing themselves with their deposit? I do, but I am not typical. If a bank sets up a branch in the UK and is regulated outside our shores, there should be a clear obligation to UK depositors to inform them of the limits of their protection and under what governance that protection will operate.

Ian Pearson: My hon. Friend makes a good point. A branch of a bank that is outside the UK should make clear the basis on which it is regulated, and the guarantees that are available. As for whether the Financial Services Compensation Scheme would meet a shortfall from the Icelandic scheme, that is not the case. A shortfall would not fall on the FSCS. It would be paid for by the Treasury, but we do not know whether there will be a shortfall because it is still part of the administration process.
I repeat that local authorities are in a different class to retail depositors when it comes to compensation. I discussed the situation with the Local Government Association, and we have been monitoring closely the potential impact on local councils. The Department for Communities and Local Government is actively supporting and working with local authorities that may have some short-term difficulties. But there are few of those. To repeat the commitment, the Government will continue to put pressure on the Icelandic authorities to make sure that local authorities and other wholesale creditors are treated fairly during the administrations that are taking place in Iceland.

Sally Keeble: I understand that all these investments were given good ratings by the credit ratings agencies. I know that my hon. Friends colleagues were looking at increasing regulation on them. How is that going?

Ian Pearson: I am not sure that I would use the same terminology to describe the ratings given to Icelandic banks. I do not believe there is any evidence of negligence by local authorities in the way they have used their public funds. The vast majority of them have been quite responsible in what they have had to do. However, my hon. Friend raises a point about the regulation of credit agencies and we shall want to consider that in future.

Colin Breed: The Minister is right to say that there is a world of difference between ordinary depositors and local authorities, bearing in mind the fact that they employ well-paid treasurers with significant qualifications, experience and everything else. It is just another reflection of the fact that everyone is passing the buckthinking that as long as a bank has a triple A with a credit ratings agency, they do not have to do their job. Quite frankly, one does not have to employ a very senior treasurer to look at a list to see whether an institution has three As. I could probably do that myself in my spare time. We would not expect local authority treasurers to base the whole of their judgment upon something like that. I accept that they have acted responsibly in everything else, but we shall have to go back to that point.
This is rather group think, unfortunatelybecause everyone else is doing it, it must be perfectly okay. It is like lending to Mr. Maxwell a few years ago. Reference was made on a number of occasions by the LGA and some individual authorities to the fact that they were following the Governments advice. I can find no advice or website where the Government said that it was perfectly okay to invest local authority money in that way. Will the Minister confirm whether there was any such advice?

Ian Pearson: We are straying a long way away from new clauses 1 and 2 and clause 155. The Government certainly were not advising local authorities to put their money in Icelandic banks. The hon. Gentleman will have seen the guidance that is issued by the Department for Communities and Local Government.

Mark Hoban: Will the Minister give way on that point?

Ian Pearson: It is not part of the Bill.

Roger Gale: Order. If it was out of order, I would have pointed that out. It refers to compensation and it is in order.

Ian Pearson: I stand corrected, so I give way.

Mark Hoban: Just to be helpful to the Minister for a change, I have a copy of the guidance here. It is in a very helpful Library note, which refers to the DCLG website, and says:
The guidance recommends that priority should be given to security and liquidity. However, that does not mean that authorities should ignore yield. It will be appropriate to seek the highest rate of return consistent with the proper levels of security and liquidity.

Colin Breed: That is what we pay treasurers for.

Mark Hoban: I thought it would help the Committee to understand what guidance has been given. The other point that may help the Minister is that the Isle of Man scheme protects depositors up to £50,000. I am not sure that the same level of protection applies to Channel Island authorities.

Ian Pearson: I thank the hon. Gentleman for reading out the guidelines. There are separate jurisdictions for regulation purposes and they have separate compensation schemes. When people are making investments they need to be aware of that and it should be made clear to them, as part of the normal process.

Robert Flello: Sadly, most of my constituents will not have more than £50,000 in savings, but there will undoubtedly be some who do. At some point, charities and organisations will have such amounts in their accounts, as will businesses. Given that most of my constituents will not have access to treasurers and will rely on credit agencies, when the trauma in the markets and financial world has ended and things have settled down, what sort of support and assistance can be offered to constituents who have more than £50,000? Although I support the Government in their proposals to do everything that they can now, I am concerned about the future.

Ian Pearson: I reassure my hon. Friend that few of his constituents will be in that situation. According to our figures, 98 per cent. of accounts in banks and 97 per cent. in building societies have deposits of less than £50,000. If any individuals in his constituency have amounts that are significantly in excess of that, I am sure that they will be talking to individual financial advisers who will direct them on such matters.
Mr. Flellorose

Ian Pearson: I want to make progress as we are due to finish at 10.25 am and I am answering questions at 10.30 am.
The authorities remain committed to a seven-day target for providing depositors with access to at least part of their funds, with the remaining balance following within a few days. The importance of ensuring that fast payout has been raised in Committee. The Government accept that and we are doing all that we can to ensure that it happens. It is a challenging target, especially if the FSCS has to pay depositors individually or if accounts must be opened individually with new banks.
The hon. Member for Fareham, and others, raised a number of important issues in respect of close family members, distinguishing small businesses from larger ones, brands and netting off. The FSA has made it clear that it wants to tackle those points as part of the consultation process that is taking place at the moment. We do not believe that we need to put such matters in the Bill, as it is more appropriate for the FSA to deal with them through its rules. Any changes can be introduced as amendments to the FSAs rules.

Mark Hoban: We shall have time later on for the Minister to continue his speech. Does he not have a view on these issues? Yes, it is for the compensation scheme and the FSA to come up with the rules, but surely the Government have a viewthey will end up picking up the pieces if the scheme rules are wrong.

Ian Pearson: When a consultation takes place, it is right for us to listen to what the consultees say before we come to a conclusion. The FSA will come up with a view on these matters. Obviously, the Government will have their own view, but it is right and proper to listen to what people say. This is a matter for the FSA under the powers provided in FSMAthe Financial Services and Markets Act 2000.
The hon. Member for Fareham also raised the issue of gross payment. Obviously, that can facilitate faster payout and help ensure that depositors with large mortgages always have access to cash. However, it may require some amendments to the insolvency rules for the bank insolvency procedure, to ensure a fair result for customers, other bank creditors and the FSCS. We will be considering that.
The hon. Gentleman was also concerned about consumers being left in the dark about the Financial Services Compensation Scheme. I want to be clear that the FSA and the FSCS are conscious of the importance of consumer awareness. As part of that, the FSA is considering whether to back up industry initiatives with further rule changes in the future.

It being twenty-five minutes past Ten oclock, the Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One oclock.